Lecturer

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3Global Expansion

GLOBAL BUSINESS EXPANSION

Lecturer

Aguir and Gopinath (2007) indicate that emerging markets exhibit counter-cyclical operational accounts and consumer unpredictability that supersedes income changes. There are also some stops in the capital inflows. The scenario is totally different from developed economies that have small but open economies. Emerging markets have changing policy regimes and the growth trend is unpredictable because of the ever changing fiscal, monetary and trade policies in these countries. Mexico is one of the most attractive emerging markets to investors in terms of growth rate and equity valuations.

Internationalization seems to be the dominant strategy by companies in the 21st century, the process entails, worldwide amalgamation of financial operations, liberalization of trade, less strict regulations and opening of markets. Globalization also involves emphasis being directed towards social, financial and integration of cultures.

The emergence of internationalization among companies from emerging economies has challenged the existing classical theories on an international firm. If a company is to thrive in a new location, then it has to produce locally significant commodities in order to remain relevant in its operations or rather to sustain its existence in the new market.

There are some basic reasons why companies from emerging economies seek to expand internationally. Firstly, these companies are able to access new markets that often translate to more sales and exposure that act as learning opportunities for the multinational corporations. Secondly, the companies from emerging companies also manage to utilize their tangible and intangible assets to amass more profits for the company. Additionally, the companies are able to acquire strategic assets that would enable them achieve their corporate goals in accordance with the companies visions and missions. Consequently, the multinational companies from emerging markets can make use of readily available resources from other countries. Seemingly, in the home countries, the resources may be scarce thus hindering production. Scholars have also revealed that companies operating in more than one country are able to significantly reduce the economic and operational costs as well as the political risks that may be eminent in home countries. Internationalization however comes at a cost and the company seeking to expand its operation requires having some particular strongholds to stand competition from competitors in the countries they seek to venture into. At the same time, the existing conditions in the country a company wants to expand to have to be taken into consideration. Some of the factors that require prior scrutiny are those of the technological infrastructure, political climate, competition and culture in the potential market (Lessard and Lucea, 2008). Without such considerations, a company may be destined to fail in a foreign market because success depends on the preparedness of the company to handle and overcome barriers.

Firms from emerging markets are globalizing at rapid rates to take advantage of the available opportunities in the global markets. However, techniques that are workable should be applied to enable these companies to exploit the opportunities available from foreign markets. As much as there are opportunities, there are also threats that are eminent and the multinational companies from emerging markets should be well braced to handle them amicably and still thrive in business. Most of the multinational companies from emerging markets are motivated by certain factors to go global (Mathews, 2006). Firstly, there are market restrictions in home countries that hinder growth of local companies. Secondly, in most emerging markets, it is always difficult to export products to other nations and as such, business is usually restricted to local sales.

Ghemawat (2003) reveals that in previous times of the 17th and 18th centuries, the main motivation behind internationalization by companies was that of arbitrage a fact which is often overlooked by most business researchers. Major trading companies that existed during the 17th and 18th centuries arbitraged amidst the heavy economic costs and availability of opportunities availed by geographical differences. Replication of totally new business ideas in different locations did not start until the end of the 19th century.

In the recent past, some emerging multinational companies are coming up with totally different ideas as compared to the existing giant global companies. For instance CEMEX is a Mexican Company that operates in four different continents. The company began its internalization process in 1989 and has since then become the largest producer and trader of cement. The internalization of CEMEX was only possible because the Mexican government had lessened their emphasis on controls by that time. The company made use of strategic acquisitions in different parts of the world especially in the Latin countries. CEMEX most recent breakthrough was that of acquisition of RMC cement group in the UK that enabled the company to penetrate the European markets. The company succeeded because it made use of Geo-positioning Satellite to track their deliveries all over the world an invention the established companies had not tried and therefore, enabled CEMEX to make use of late comer advantages (Mathews, 2006).

Ghemawat (2003) indicates that CEMEX has broke the norms of the so called Mexican risk by listing the company on the New York Stock Exchange, additionally, the company has also folded its non- Mexican assets to operations in Spain where taxes are not applied on interests rates which are also relatively low as compared to other countries. The company has further formed partnerships with its insurer AIG and the private arm of the Singapore Government Investment Corporation. The tactics has enabled CEMEX Company to reduce operational costs and further strengthening its position as the world’s largest cement manufacturer.

The company employs graduates from leading schools all over the world and deploys them in the company’s operations all over the world. Additionally, the company makes use of foreign management and consultation especially from American specialists. CEMEX has focused on cement production instead of diversifying into other industries like most of her competitors. Consequently, the company has incorporated into its operations heavy use of information technology thus making the company have strongholds in being updated on major issues (Ghemawat, 2003). The use of international workforce also ensures that the company has diverse talents to handle the work at various levels of management.

According to Lessard and Lucea (2008), CEMEX has grown from being a Mexican local company with 6,500 employees and annual revenue of 275 million US dollars to a multinational company with presence in over 50 countries having about 65,000 employees and yearly revenue of 21.7 billion in 2007 alone. Before making steps towards internationalization CEMEX the company had identified some core competencies such as those of engineering, ICT and a culture founded on honesty. Based on the fact that the company did not have cost arbitrage because cement is a commodity often under priced despite the weight of packaging, CEMEX had spent about 1 billion US dollars to strengthen its position at home. The company solidified its position at home by acquiring and integrating its operations with those of the acquired companies. As such, by the time the company decided to go global, it had mastered the art of acquisition and integration from back home.

Additionally, the company had started laying some foundations for its expansion strategy by establishing a communication network CEMEXNET which enabled the company to coordinate communication in all of its 11 factories in Mexico. The company devised the plan to avoid the national communication system which was ineffective and expensive at the same time. The company had also established an executive communication system in 1990 that enabled the managers to input data regarding sales, stocks and other inventory from the company and all managers would view this data thus enabling the chief executive officer to monitor the company’s operations. Just before conducting its internationalization process, CEMEX acquired the previous largest producer of cement in Mexico Tolteca Company (Lessard and Lucea, 2008). Thus, by the time CEMEX expanded it was strong from its foundations in Mexico.

A construction company like CEMEX in its quest to internationalize is amidst some challenges and as such the globalization strategy must be backed by a clear understanding of the threats and opportunities in the foreign markets. According to Gunhan and Arditi (2005) a survey conducted by the Delphi Survey Company revealed that some of the major strengths that a company seeking to globalize should be those of: good track records, specialist experts in every level of their operations and a capability to manage each project. On the other hand, the survey found out that the main threats to globalization are shortage of funds to carry out day to day activities, loss of experienced personnel and even lack of them also poses a major challenge for companies from emerging economies seeking to operate internationally. Inflation and currency volatility are some of the most challenging threats that a company has to cope with at the international level. Bessant, Lamming, Noke and Phillips (2005) indicate that the major opportunities upon globalization that companies can take advantage of is that firstly, the company will enjoy continuous profits from the increased sales. Additionally, companies operating from a global perspective are likely to maintain shareholders returns which are consequently increased from the expansion process. Lastly, a major opportunity that a multinational company from an emerging economies likely to enjoy is the fact that global markets are open which if often contrary to their own countries.

The ability of an emerging market multinational corporation to thrive and withstand the turbulent international environment depends on its dynamic capabilities. Dynamic capabilities require companies to achieve benefits from expansion ventures. Possessing, deploying and upgrading dynamic capabilities are major indicators of competitiveness in the global market and predictor of success. Capability possession entails a company having unique resources to counter completion in the global market. Consequently, deployment involves a company allocating the unique resources into the operations of the company and finally upgrading revolves around training and development of the existing talents (. All these characteristics are what has made CEMEX successful in its globalization strategy because it operates on the premise that without qualified and motivated employees work cannot flow easily. Multinational corporations from emerging markets often prefer to make use of their distinct resources through expansion by wholly owning other companies or working as subsidiaries. CEMEX in most of its expansion strategies makes use of acquisition.

The impact of changing environmental conditions is of much importance and should be considered by companies that seek expansion. Environmental volatility is often difficult to control however, the changes in environmental conditions often bring forth some opportunities for corporations to take advantage of (Luo, 2001). Companies seeking markets in foreign countries should therefore gauge potential threats and opportunities to help them determine whether the returns outweigh the risks involved.

Unlike changes in the environment, hostilities eminent in the foreign markets pose a greater threat for corporations seeking to expand. The hostilities are often in the form of policies that are not favorable for business such as taxation policies, secondly, the countries may not have strict rules for protection of patent rights, and poor infrastructure may also be a threat to progress of a multinational corporation in terms of transportation and communication networks as well as the information technology. Another threat that may challenge the operations of a multinational corporation in a foreign country is the scarcity of resources which an essential part of production (Luo, 2001). Stakeholders in a business operating in a volatile environment are likely to be uncooperative because all of them seek to establish moves that give them the best payoffs at the expense of the company.

There are some lessons that business managers can learn from internationalization and how interplay between home and host country’s differences in achieving success. Firstly, for a domestic company like what CEMEX Company once was to succeed globally, it has to have a strong footing in its local market; the company has to be doing great in its home country so that it is able to expand. According to Barkema and Vermeulen (1998) basically the idea of a company first succeeding in its home country is premised on the fact that before a company is able to be financially stable and having mastered the tactics required in a particular industry, it has to have acquired the experience from local market.

Biachi and Ostale (2006) reveal that while internationalization can be a great source of increased profits for companies, it does not always apply because in some instances companies and specifically mangers can experience losses and frustrations in foreign markets. Business managers should also learn that success in home countries does not always translate to success in foreign economies. There are examples of retail ventures into international markets that turned out to be failures such as the Marks and Spencer UK.

Another lesson that business managers should put into consideration is the difference between the environment in the home economy and that of the international market and how well a company is able to cope with the differences. The ability of a company to admit that there are different environmental conditions in different countries is the basic lesson and focal point of any multinational corporations. The differences should then be integrated within the operations of a company to achieve success in foreign markets (Biachi and Ostale, 2006). As such, managers should realize that a company cannot expand internationally without aligning its products and services to fit into different and distinct cultures and consumers.

Another lesson that managers in businesses that have expanded or plan to expand globally is premised on the management portfolio at different levels especially based on the fact that expansion implies that businesses now have more responsibilities embedded on the operations of a company in different countries (Meyer, Mudambi and Narula, 2011). Managers thus have more responsibilities and how well they manage to cope with the responsibilities is a major determinant of their success.

Another key lesson for the managers in multinational corporations is on the fact that before a company decides to venture into a different market; considerations should be put on legal aspects especially on patent rights in the new markets and also on the ability of a company to cope with volatile and at times hostile environments (Meyer,Mudambi and Narula, 2011).

In summary, emerging markets are those characterized by slow economic growth and their economies are often closed with constraints of export. Mexico is among the emerging economies and the country has over time opened up trade to other economies and that enabled companies such as CEMEX to expand internationally. The company is a leading manufacturer and trader of cement in the world. CEMEX has presence in over 50 countries and its major business strategy is that of acquisition of other companies. There are some threats and opportunities eminent in the international market. Some of the threats include competition, poor infrastructure, volatile and hostile environments while the opportunities are those of increased and continuous profits, open economies and reduced operational costs.

References

Aguiar, M. and Gopinath, G., 2007. Emerging market business cycles: The cycle is the trend. Journal of political Economy, 115(1), pp.69-102.

Mathews, J.A., 2006. Dragon multinationals: New players in 21st century globalization. Asia Pacific journal of management, 23(1), pp.5-27.

Ghemawat, P., 2003. The forgotten strategy. Harvard Business Online.

Lessard, D.R. and Lucea, R., 2008. Mexican multinationals: Insights from CEMEX.

Gunhan, S. and Arditi, D., 2005. Factors affecting international construction. Journal of construction engineering and management, 131(3), pp.273-282.

Bessant, J., Lamming, R., Noke, H. and Phillips, W., 2005. Managing innovation beyond the steady state. Technovation, 25(12), pp.1366-1376.

Luo, Y., 2001. Dynamic capabilities in international expansion. Journal of World Business, 35(4), pp.355-378.

Barkema, H.G. and Vermeulen, F., 1998. International expansion through start-up or acquisition: A learning perspective. Academy of Management journal, 41(1), pp.7-26.

Bianchi, C.C. and Ostale, E., 2006. Lessons learned from unsuccessful internationalization attempts: Examples of multinational retailers in Chile. Journal of Business Research, 59(1), pp.140-147.

Meyer, K.E., Mudambi, R. and Narula, R., 2011. Multinational enterprises and local contexts: The opportunities and challenges of multiple embeddedness. Journal of Management Studies, 48(2), pp.235-252.